Does the quality of political institutions affect intra-industry trade within trade blocs?

What is it about?

This article tests for the effect that political regime and governance may have on the intensity of intra-industry trade. We examine if the quality of political institutions and economic factors affect the intensity of horizontal and vertical intra-industry trade. We find that control of corruption and good governance both increase the vertical intra-industry trade but not the horizontal intra-industry trade. We also find that intra-economy FDI flow, stable exchange rate regime, market size and proximity positively affect intra-industry trade within a trade bloc. However, the negative effect of corporate tax rate suggests that if countries were to coordinate their tax policies, they could avoid harmful tax competition and promote intra-industry trade across their borders.

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Why is it important?

There has been a renewed resolve for deeper integration and cooperation within ASEAN. Intra-industry trade is often viewed as a way of achieving economic as well as political integration. The findings of this study have certainly warrants the attention of policymakers and researchers alike.